Employees should be aware that the IRS has recently made significant changes in the guidelines for completing your W-4 Tax Form, the Employee’s Withholding Allowance Certificate. This form tells your employer how much you would like for them to withhold from your gross pay for federal tax payments.
Withholding too little can mean you can end up with a larger amount to pay in at tax time. Withholding too much of your pay suggests that you are allowing the government the benefit of extra money to use during the year that will result in a refund back to you. Finding the right balance is your decision.
In December 2019, the IRS issued a new 2020 W-4 form and guidelines for determining your withholding amounts in the future. The new form represents significant changes to the prior guidelines.
Who Must Complete the New W-4?
Existing employees are not required to complete the new W-4 form. Employers will continue to calculate your net pay based on elections from the earlier W-4. Filing status and withholding allowances from the prior form will still be valid.
However, existing employees who wish to make any changes in their status, the new form is the only one available. The IRS designed the Withholding Tables to work for both the new and the earlier W-4 forms.
All new employees who come aboard after the start of 2020, however, must complete the new 2020 W-4 form.
What’s the Difference?
The new design is intended to make completing the Form W-4 less complicated.
There are several differences between the prior W-4 and the new one that has been redesigned as part of the Tax Cuts and Jobs Act passed in 2017. These changes have revamped the roadmap for tax rates, exemptions, and deductions.
While new Tax Tables were generated for 2018 and after, the W-4 continues to list exemptions allowed for oneself, spouse, and dependents.
Because the IRS can now cross-check against the exemptions declared in your tax filing, they recommend that it matches the number of allowances you may use for calculating your withholding rate.
If you wish to have more withheld, you may do this in Step 4.
The change, according to the IRS, is intended to improve transparency and simplicity.
Complete in 5 Steps
The new W-4 consists of five simple steps. Only Step 1 and Step 5 are mandatory, while Steps 2,3, and 4 ask for more information that may be applicable to your situation. Completing all steps will most likely ensure that your withholding will most closely match your tax liability.
- Step 1: Personal Information
- Step 2: Indicate multiple jobs or if your spouse is working
- Step 3: Number of dependents: The IRS allows a Child Tax Credit for each child under the age of 17 and $500 for other dependents for taxpayers with annual incomes under $200,000 ($400,000 for couples filing jointly).
- Step 4: Additional full-year non-wage income from dividends, interest, outside work, and for electing to have additional withholding.
- Step 5: Your signature
To help you complete the new W-4 accurately, new employees can take the form home to finish. This allows you some time to carefully consider your entries.
The IRS even offers an online program, Withholding Estimator, to help you through the process. This tool is also helpful for calculating any withholding adjustments resulting from major life changes like marriage, the birth of a child, adoption, or home purchase.
Claiming Exemption from Withholding
Certain individuals can claim exemption from an income tax withholding only if they:
- Owed no taxes in the prior year, and
- Expect to owe no taxes in the current year
However, be aware that if you do owe taxes after claiming exemption from withholding, you will owe both the taxes and penalty. Claims for this exemption must be declared each year.